Last week, the U.S. Congress finally passed an unprecedented financial bailout package aimed at thawing out frozen credit markets, but the market’s response was telling — the Dow Jones Industrial Average plunged 474 points from peak to close on Friday. Not exactly a vote of confidence.

The start to this week showed no improvement either, as investors woke up to another Black Monday. Stocks plunged in a global stock market rout, with the Dow down nearly 800 points at its low. The problem? Washington’s plan may be too little too late! The U.S. economy is probably mired in recession ALREADY, and Wall Street’s NIGHTMARE is already spilling over to Main Street America.

The unprecedented volatility we’re seeing in financial markets is like nothing ever experienced before. Triple-digit swings in the Dow have become common! One day stocks are soaring … the next they’re sinking again!

In the past several weeks alone we’ve seen: Lehman Brothers, AIG, Merrill Lynch, Fannie Mae, Washington Mutual, Wachovia … ALL of these former blue-chip financial stocks have either failed outright, or ceased to exist as independent firms due to this crisis.

Many of our clients have asked us not only for guidance in these trying times, but also for a strategy that can offer them self-defense in a severe bear market climate. To help answer these pressing questions and many more — Sebastian Leburn, our Chief Investment Officer and Mike Burnick, our Director of Research & Client Communications — joined me for a special video briefing last week: The Bear Market Defense Forum.

In this important briefing, we discussed our outlook for the economy and financial markets, plus offered a solution to help defend your wealth, and potentially earn profits for you, even in this bear market! Interested? There was too much material to fit into one issue of Money and Markets, so we published Part I of the Bear Market Defense Forum Transcript in Money and Markets last Wednesday. Here’s an edited transcript of the second half of the presentation. Enjoy …

Sherri: The critical question for investors right now is this: Specifically what investment decisions SHOULD you consider right NOW to help hedge your investments in a bear market?

And for an answer to that question, Sebastian Leburn, our Chief Investment Officer and portfolio manager of the Weiss Bear Strategy, not only has an opinion, but is also taking ACTION on behalf of our clients across a variety of investment programs.

It’s the action he is taking in one strategy in particular that we are going to discuss today. Sebastian, you manage our Weiss Bear Strategy. What are you doing in this program, and why?

Sebastian Leburn, CFA: Hi Sherri, thank you. Before I get to that, I’d like to talk a bit about the situation most investors find themselves in today. I think it’s important to put all of this in the proper perspective.

Sherri: Sure, go ahead.

Sebastian: As Mike mentioned, we see the credit crunch deepening — likely to get worse before getting better. By and large, the stock market sell-off thus far has been mainly due to investors’ concerns over housing, and financial stocks in particular, not to any recognition of a recession. This is critically important, because the greatest risk for investors going forward — in our view — is more disappointment.

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Sherri: Once investors recognize we’re in recession, which we believe has already started, then we are likely to see more market losses, correct?

Sebastian: I’m afraid so. We’re likely to see earnings disappointments escalate and default risks rise for companies outside of the financial sector. This is why I believe our pros at Weiss Capital Management can play such a vital role right now. We have navigated challenging markets before, and have programs especially designed for these tough market conditions.

Sherri: That’s a good point because many individual investors seem to be caught off guard by this turmoil, while we’ve seen it coming for over a year.

Sebastian: Here’s a key point: Most investors have good experience investing in bull markets, and many can do a pretty good job on their own, but the majority of investors have very little experience investing during bear markets. This is where a professional money manager can play an even more vital role today.

Sherri: Let’s say I’m a new client. Share with our viewers how you would work with me.

Sebastian: Sure, rule number one is to PROTECT your wealth, particularly important during bear markets. The second priority is to help you grow your wealth over time in all kinds of market conditions.

Our experienced Financial Advisors will work closely with you to learn about your investment experience, investment objectives and time frame and most importantly, your tolerance for risk.

We go over your current investment portfolio with a fine-tooth comb, and provide specific advice on securities that you own: What you may want to sell and what you should hold based on what we learn about your needs. Then we help you decide on an appropriate investment strategy, and we manage it for you.

Sherri: That reminds me of the old Greyhound Bus commercial, “Leave the driving to us.”

Sebastian: Exactly. Many investors do their own driving nowadays. But when the weather is stormy and roads icy like today, it’s even more important to have the expert guidance of a trusted money manager making the day-to-day decisions. Ultimately, you’re still in the driver’s seat. But you don’t have to deal with it day to day, or even month to month, that’s our job.

Sherri: Of course. But let’s focus now on the BIG PICTURE goals of the Weiss Bear Strategy.

Sebastian: The Weiss Bear Strategy has two Big Picture goals:

#1: To help protect you from a bear market, and

#2: Turn falling markets into potential money-making opportunities.

Sherri: Most brokers tell investors to “just ride out” a bear market. They rarely talk about protection — let alone profits from a bear market. Some say that bear markets are short and that eventually the market will turn back up — if you wait it out. So holding for the long term, is a well-known mantra in our profession.

Sebastian: There is nothing wrong with buying securities- such as stocks- or bonds and holding them for the long-run. In fact, we’ve designed several programs that do just that, because stocks and bonds are great asset classes for building wealth over the very long term.

The problem is most individual investors, and many brokers and money managers, fail to hedge their long-term holdings during challenging financial market conditions like we have right now. This is why I think we at Weiss Capital Management are quite unique.

Sherri: And the Weiss Bear Strategy is a unique program we offer that provides our clients with this valuable hedge in troubled times. Why don’t you share with us how the Weiss Bear Strategy is doing in this tough climate?

Sebastian: In the 12-months ended June 2008, the Weiss Bear Strategy gained 8% after all fees and expenses. Meanwhile, over the same period, the S&P 500 Index, which is our benchmark, LOST 13%.

Sherri: So the performance difference between someone who invested in the S&P 500 versus someone who invested in the Weiss Bear Strategy was a positive swing of 21 percentage points.

Sebastian: That’s right Sherri.

Sherri: Of course that was a period of poor performance for the stock market, when you’d naturally EXPECT a contrarian strategy to outperform. What about going back further in time?

Sebastian: Sure, let’s go back to the very beginning. We began the Weiss Bear Strategy in December 2000, during the early stages of the bear market that began after the tech-stock boom went bust.

From inception through the end of June 2008, the S&P 500 Index produced a total return of just 10.56%. Meanwhile, the Weiss Bear Strategy has returned over 30% during the same period.

Sherri: Almost three times better than the S&P 500. And, that’s for a bear strategy during not only a bear market but during a bull trend as well. That’s pretty substantial.

Sebastian: Yes, we think so. $100,000 invested in the Weiss Bear Strategy would have GROWN to over $140,000 during that period, while the same amount in an S&P 500 index fund would have SHRUNK to approximately $66,000 — or one-third less.

Of course past performance is no guarantee of future results, and I can only tell you how the strategy HAS performed, not how it WILL perform going forward. But I can also tell you that the Weiss Bear Strategy is an all-weather strategy that has proven performance in bear markets and resiliency in bull markets.

Sherri: Sebastian, as you know, we’ve had a surge of interest in the Weiss Bear Strategy, and for obvious reasons. But a question we often get from our money management clients goes something like this: Bear markets are temporary. So why invest in a program that’s predicated on a temporary phenomenon?

Sebastian: While bear markets do occur less often, they’re an integral part of a full market cycle — which typically last about five years.

A bullish phase may take up two-thirds of that period, and while the bearish phase is shorter in duration, it can still wipe out about half or more of your gains from the previous bull-market. Even more destructive are secular or long-term bear markets, which have occurred several times over the past 100 years after valuations reached unsustainable levels.

Sherri: So we come to the question that’s on everyone’s mind: Where are we right now in this bear phase?

Sebastian: Well, of course, no one has a crystal-ball that says how long this bear will last; or how low stocks prices may go.

However, I would argue that we may only be about half way through it, given that we started this secular bear market with valuations at record levels.

It’s important to keep in mind, however, that stocks can still do well for periods of time during secular bear markets. For example, the S&P 500 briefly reached an all-time high last year, and was up every year from 2003 through 2007.

Mike: Right, but the S&P only made a marginal new high at best — above its peak back in 2000 — eight years ago; and the Nasdaq is still nowhere near its old high; it didn’t even come close, right?

Sebastian: That’s a good point. In fact, the Nasdaq is still down about 50% from its peak in 2000. That’s because the index fell so far when tech stocks collapsed in 2000 — the Nasdaq lost nearly 80% of its value over the next 3 years — and the S&P 500 was cut in half. You see, the frustration for investors during bear markets is that returns are mediocre when compared to bull markets because overvalued stocks take time to adjust.

Mike: And investors can experience many false-starts along the way, when it looks like a new bull trend has started, but stocks end up collapsing again.

Sherri: With that in mind, Sebastian, as the portfolio manager, what would you say is the best time for investors to take advantage of a bear strategy like ours?

Sebastian: First, let me tell you what I think would be the WORST time.

Sherri: OK.

Sebastian: The worst time would be when the market has already crashed, when the market has already suffered a long bear market and nearly all of the damage to investor portfolios has already been done. The BEST time is when the market is enjoying an intermediate rally, and in a bear market, one of the most common triggers for that kind of a rally is when the government steps in with a major rescue operation.

Sherri: So when the Treasury or the Fed or Congress announces a major bailout, and the market responds with a sharp rally, you don’t believe that’s the time to jump right back into the stock market?

Sebastian: No! It’s just the opposite. As we said earlier, there are still too many UNKNOWNS in this government bail-out plan. Even once we have all the details, how these drastic measures will impact our financial system in the long run, that’s anyone’s guess. So I think we could see more volatility ahead for both stocks and especially bonds, as the tremendous cost of this plan becomes clear.

As Mike said, this bail-out may end up costing taxpayers TRILLIONS of dollars, which could be very bad for government bond prices in the long run, sending interest rates spiraling higher. Stocks prices could suffer as well. If we do see a strong relief rally in the near-term, it could be a good time to position yourself for the next major decline in financial markets with the Weiss Bear Strategy.

Our more immediate concern now is that we are in the midst of a credit crunch that has spilled over into the broad economy, yet most investors haven’t come to grips with this yet. Everyone is focused on Wall Street’s problems — while conditions on Main Street are bound to become even more strained. Unfortunately, investors do not appear prepared for this.

Sherri: So, this means more trouble ahead for stocks, after a rally in the middle of this decade?

Sebastian: Very possible. You know, this kind of secular bear market scenario has played out before by the way. From 1966 to 1982, U.S. stocks barely budged.

As you can see on this chart, during that 16-year stretch, there were nine different bull and bear markets, yet overall, the Dow Jones Industrial Average went nowhere for a very long time.1

A lot of economic upheaval occurred in the late ’60s, and throughout the ’70s, including major price spikes in oil, gold and other commodities.

Mike: In a similar vein, today’s credit crisis isn’t just a short-term problem in the mortgage market; it’s a much bigger issue that’s causing upheaval through the entire financial system.

Sebastian: That’s right, we’re in the midst of a major financial crisis brought on by years of easy credit, lax lending standards and oversight, and just too much speculation. My big worry is that we may be in store for a long period of de-leveraging — or debt pay-back, which could take years to work through the economy.

Sherri: Not exactly good for corporate profits- or most importantly for consumers— who make up two-thirds of our economy as we mentioned earlier.

Sebastian: No, in fact it’s a serious headwind for corporate profits, for consumer spending, for the entire economy. We’re looking at the worst housing depression since the 1930s. Consumer confidence is down dramatically in the last 12 months alone; one of the worst declines in history. And as Mike said earlier, all this is BEFORE the government officially recognizes a recession.

Mike: And the housing bust, which helped trigger this financial crisis, isn’t over yet. In fact, it could last a lot longer than many folks think possible.

Sebastian: Exactly. With inventories of unsold homes near record highs, with nearly a year’s worth of existing homes up for sale right now. That’s a huge overhang that will keep pressure on home prices for some time to come. The number of foreclosure filings nationwide is going through the roof as a result.

Sherri: That sounds like a vicious circle as foreclosures push home prices still lower, which leads to more foreclosures. This leads to even more loan losses at banks, and potentially lower housing prices ahead. It’s certainly not the kind of market to just “ride out.”

Sebastian: That’s right. No one knows what the future will bring, but unstable markets demand unconventional actions to help protect capital.

Sherri: It looks like we face more challenges ahead. Let’s assume that we are in the midst of a steeper, secular bear market decline that includes years of false-starts before finally coming to an end. How can investors get positioned to weather this storm and preserve their wealth?

Sebastian: One of our specialty investment programs here at WCM is specifically designed to help preserve your capital and potentially earn profits, even in a bear market environment like today, which is our Weiss Bear Strategy.

Sherri: How are you able to profit when stocks are going down? Are you selling short?

Sebastian: No. We actually never sell short individual stocks in the Weiss Bear Strategy. I have learned from experience that for the average investor, selling short individual stocks can be extremely risky. We merely buy specialized mutual funds — called inverse funds — that are designed to go up when the market goes down.

Sherri: Tell us more about how you use these inverse funds.

Sebastian: We use one fund that’s designed to rise in value when the S&P 500 Index falls. The other fund is designed to rise in value when Treasury bond prices fall — and interest rates rise. That doesn’t cover ALL the bases all of the time. But between these two investment vehicles, I think we’ve got most of the bases covered, most of the time. I do want to point out that the Weiss Bear Strategy is not a go-for-broke strategy. Our goals are: #1 to PROTECT, and #2 to GROW your money in bear markets; as well as provide INCOME during bull markets.

Sherri: I think that’s important, Sebastian. So please elaborate.

Sebastian: Sure. If you have money in our Weiss Bear Strategy, and the market is declining, the goal is PROFITS — using those inverse funds I just mentioned.

But, if markets are going UP, the goal is INTEREST INCOME — in the safety of cash using our own Treasury-only money market fund. In other words, our aim is to be aggressive in bear markets, and defensive in bull markets with this strategy. We think that’s a good combination, especially during times like these.

Sherri: So you’re not just buying and holding inverse funds?

Sebastian: No. We have a proprietary model that helps us gauge the intensity and strength of a bear market in either stocks or bonds. We also monitor the strength of any market rally within a bear market. Then, based on these readings, we progressively allocate more — or less— money to inverse mutual funds.

If we’re in a confirmed bear market, naturally, we’re more likely to be aggressive, and more fully invested in inverse funds, in anticipation of further market declines.

If we’re in a bull market, we use these inverse funds much more sparingly and for shorter periods of time, keeping most or all of our clients’ money in cash, earning interest.

Sherri: Can you give us a real-world example of the Bear Strategy in action this year? For example, when the market rallied during March and April, but then rolled over again in mid-May, how were you allocated?

Sebastian: In May, all of our indicators were unanimously telling us that the market was technically overbought within the confines of a bear market. This told me we were vulnerable to another correction. Our models allocated 90% of the strategy to inverse funds during the early and middle part of May, and took advantage of the sharp decline in the market that followed.

Sherri: But you don’t recommend investors joining us today to mimic that allocation?

Sebastian: No, and I don’t for three reasons:

First, the Weiss Bear Strategy is not for ALL investors — it is an aggressive strategy.

Second, the Weiss Bear Strategy is not for your whole portfolio, it’s a specialty strategy that works best during declining markets. For proper diversification, we recommend you also put some money into other investments — ideally core programs offered by our firm.

Third, as I said a moment ago, the Weiss Bear Strategy is not a buy-and-hold strategy. So the allocation I just mentioned is merely a snapshot in time.

Depending on the signals from our model, it’s constantly changing. It makes little sense to mimic a particular allocation from a point in time, since it’s changing all the time.

Sherri: Why don’t you give our viewers a sample of how that works? Show us how the Weiss Bear Strategy has navigated volatile markets this year.

Sebastian: Sure. Remember, the goal is profits while the market is going DOWN … and interest income while the market is going up.

Sherri: And the market HAS been going down.

Sebastian: Mostly, but not always. In fact, we’ve had sharp rallies in between; keep in mind that some of the best rallies in stocks occur WITHIN bear markets. For example, from mid-March to mid-May, the S&P 500 jumped over 14%.

Sherri: And how did the Bear Strategy perform during that period, compared to the overall market?

Sebastian: Well, during a broader period — during the second quarter overall — the decline in the S&P 500 Index was 2.7% on a total return basis.

Mike: So as an investor, if I just bought and held an inverse S&P 500 fund last quarter, I would have made about 2.7%.

Sebastian: Correct. For every one percent the S&P 500 goes down, the inverse fund with no leverage is designed to gain one percent. So if the S&P 500 was down 2.7%, the inverse fund should have gone up 2.7%, minus fees and commissions.

Sherri: And the Weiss Bear Strategy? How did it perform in the second quarter?

Sebastian: In the Weiss Bear Strategy, we actually gained over 9%, NET of all fees and expenses, for our clients over the quarter. Of course, we cannot produce these kinds of results all the time, but I think it’s a good illustration of our tactical goals.

Sherri: And that alone is much more than most investors— or investment advisers— do, or even think about doing during bear markets.

Sebastian: True. But we seek to go beyond that. We look to make MORE money for our clients in this strategy during a bear market than what you could make just buying and holding an inverse fund

Sherri: Any other goals?

Sebastian: Yes, we seek to achieve these objectives with less risk than a full 100% allocation would imply.

Sherri: The Weiss Bear Strategy certainly achieved these objectives during the second quarter. You made money while the market was going down. You delivered a return that was THREE times BETTER than an investor might have made by merely buying and holding an inverse fund. And on average, you assumed less market risk, I presume, by doing so.

Sebastian: Right, of course past performance can’t guarantee future results, but that’s where our professional oversight comes in. By strategically purchasing inverse funds only when the potential for reward appears greatest — our goal is to outperform a strategy that just buys and holds an inverse fund for the full duration.

In other words, we look for key turning points in the market cycle, and act on our signals when the timing looks just right.

Sherri: So please tell our viewers how they can see full performance for the Weiss Bear Strategy quarter by quarter.

Sebastian: For all the details about our Weiss Bear Strategy and to get your own investor kit, just click on this link, www.weisscm.com/bearkit. You can also call our office for more info at 1.800.814.3045.

Sherri: Thank you, Sebastian, and thank you Mike.

Let me sum up. These are very challenging times, no doubt, but at Weiss Capital Management we believe we can help investors navigate them more effectively than many other firms can — because we’ve done so in the past. In fact, you can count on your fingers the advisors who know how to handle a bear market environment.

We’re here to help you manage your investments and achieve your long term financial goals; a service we feel is especially vital right now. In this market climate, the Weiss Bear Strategy may help you achieve these goals for several key reasons:

First, the Weiss Bear Strategy can help you hedge a portion of your core, long-term investments, which may be vulnerable to the next stock or bond market sell-off.

Second, you may be able to earn short-term profits during the next phase of the bear-market decline, which could come at any time. That’s exactly what the Weiss Bear Strategy was designed nearly a decade ago to do.

Needless to say, we’ve seen a lot of interest in the Weiss Bear Strategy, as you might expect, from a proven strategy that outperformed the S&P 500 Index by 21 percentage points over the past year. But please keep in mind that it’s still possible to lose money investing in this program, the same as with any investment.

Since its inception in December 2000 however, the Weiss Bear Strategy has more than tripled the return of the S&P 500 Index gaining 30.68% compared to just 10.6% for the stock index. So the Weiss Bear Strategy is a program you may want to consider for today’s unsettled markets.

To establish a relationship with Weiss Capital Management, the minimum investment is typically $250,000.

However, because we feel so strongly that market conditions will deteriorate further and investors need to prepare now, we are waiving our household minimum for a limited time to allow new investors to join for an initial investment of just $100,000 in the Weiss Bear Strategy.

But this offer won’t last indefinitely; you MUST complete your account application by October 31 to get access to the Weiss Bear Strategy for the lower minimum.

PERFORMANCE: of the Weiss Bear Strategy depends on the performance of the underlying mutual funds in which it invests. In turn, performance of the underlying mutual funds depends on the performance of equity and fixed-income markets. Returns are based on a composite of actual client accounts. Individual client returns may vary depending on, among other things, account opening date, contributions, withdrawals, and fees. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size.

Net returns cited include actual management fees, commissions, and other similar fees charged on transactions, and reinvestment of dividends, income and capital gains. Gross returns cited exclude management fees and are net of actual commissions and other similar fees charged on transactions, and include dividends, income and capital gains.

BENCHMARK: The S&P 500 Index is a capitalization-weighted index that consists of 500 large-cap US stocks, which assumes the reinvestment of dividends and capital gains, and excludes management fees, transactions costs and expenses. It is not possible to invest in an index. Index return data source: Bloomberg.

Please Note: The preceding article may contain forward-looking statements regarding intent and belief with regards to the Weiss Bear Strategy and the market in general. Readers are cautioned that actual results may differ materially from those statements. Past performance is not indicative of future returns and, as with any investment program; it is possible to lose money by investing in the Strategy. There are no guarantees that the program will be able to achieve its stated objectives. Before investing, please read the Firm’s ADV Part II and all program materials.

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.

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